What Is Considered a Large Inheritance for Tax Purposes?

An inheritance consists of assets received from an individual who has passed away. There is no single dollar amount that officially defines an inheritance as “large.” Instead, its significance is determined by tax rules and thresholds at both the federal and state levels. These regulations determine when taxes might be owed, and the value that triggers tax implications can vary depending on the taxing authority and the nature of the assets transferred.

The Federal Estate Tax Threshold

The primary federal measure for a large inheritance is the estate tax exemption. This tax is paid by the deceased’s estate before assets are distributed, not by the beneficiaries. For 2025, the federal estate tax exemption is $13.99 million per individual, meaning an estate valued below this amount will not owe any federal estate tax.

An estate’s value for tax purposes is its “gross estate,” which includes all property the decedent owned or had an interest in at death. This includes assets such as cash, stocks, real estate, and business interests. The tax is progressive, with a top rate of 40% on the value of the estate that exceeds the exemption amount.

A provision known as “portability” allows a surviving spouse to use any of their deceased spouse’s unused estate tax exemption. If the first spouse to die does not use their full exemption, the remainder can be transferred to the surviving spouse. This feature is not automatic and requires the executor of the deceased spouse’s estate to file an estate tax return, Form 706, to make the election, even if no tax is owed.

The current exemption amount is scheduled to be cut roughly in half at the end of 2025 unless Congress acts to extend it. This potential change underscores the shifting nature of what the federal government considers a taxable estate. The rules also interact with the gift tax, which has its own annual exclusion ($19,000 for 2025) for transfers made during a person’s lifetime.

State-Level Inheritance and Estate Taxes

Separate from the federal government, some states impose their own taxes, which define a “large” inheritance differently. These taxes fall into two categories: state estate taxes and state inheritance taxes. A state estate tax functions like the federal version, where the decedent’s estate pays the tax if its value exceeds a state-specific threshold. These exemption amounts are often much lower than the federal level.

The states that currently impose an estate tax include:

• Connecticut
• District of Columbia
• Hawaii
• Illinois
• Maine
• Maryland
• Massachusetts
• Minnesota
• New York
• Oregon
• Rhode Island
• Vermont
• Washington

Maryland is unique in that it imposes both an estate tax and an inheritance tax. The presence of a state estate tax means an inheritance from an estate valued well below the federal exemption could still be taxed.

A state inheritance tax is levied directly on the beneficiaries who receive the assets. The tax liability depends on the value of the assets received and the beneficiary’s relationship to the decedent. Spouses are typically exempt, and close relatives often face lower tax rates than more distant relatives or unrelated individuals.

The states with an inheritance tax are:

• Kentucky
• Maryland
• Nebraska
• New Jersey
• Pennsylvania

In some states, inheritances to children might be exempt, while a bequest to a friend could be taxed at rates of 15% or higher. This means that for a beneficiary who is not a close relative, a modest inheritance can trigger a tax bill.

Income Tax Implications of Inherited Assets

Beyond estate and inheritance taxes, the type of asset inherited can create income tax obligations for the beneficiary. This is not based on the total value of the estate but on the tax-deferred nature of certain accounts. The concept of “Income in Respect of a Decedent” (IRD) is central to these implications.

Assets classified as IRD are those that the decedent had a right to receive but had not yet paid income tax on. The most common examples are traditional IRAs and 401(k) plans. When a beneficiary receives distributions from these accounts, they must pay ordinary income tax on the money at their personal income tax rate.

This means that inheriting a $500,000 traditional IRA, while well below any estate tax threshold, represents a future income tax liability. Under rules from the SECURE Act, most designated beneficiaries must withdraw all funds from an inherited retirement account within 10 years of the owner’s death. This can push the beneficiary into higher tax brackets.

An exception exists for “Eligible Designated Beneficiaries” (EDBs). This group includes the surviving spouse, the decedent’s minor children, disabled or chronically ill individuals, and beneficiaries not more than 10 years younger than the decedent. EDBs can take distributions over their life expectancy. For minor children, the 10-year clock begins once they reach the age of majority.

In contrast, many other types of inherited assets do not trigger an immediate income tax liability. Receiving assets like real estate, a standard brokerage account with stocks and bonds, or physical property does not create a taxable event upon inheritance. Their tax consideration comes into play only when the beneficiary decides to sell them.

Asset Valuation and Basis Considerations

The valuation of inherited assets is a foundational concept for determining tax consequences for capital gains. For tax purposes, an inherited asset is typically valued at its “fair market value” (FMV) on the date of the decedent’s death. This value becomes the new cost basis for the beneficiary in a process known as the “step-up in basis.”

The step-up in basis is a tax benefit for beneficiaries who inherit appreciated assets like real estate or stocks, as it erases the capital gains that accrued during the decedent’s lifetime. For example, if a person bought a stock for $10 per share and it was worth $100 on the day they died, the beneficiary inherits that stock with a new cost basis of $100.

If the beneficiary sells the stock shortly after inheriting it for $105 per share, they would only owe capital gains tax on the $5 gain. Without the step-up in basis, the taxable gain would have been $95. This rule can eliminate or substantially reduce the tax bill associated with selling inherited property.

An executor has an option to use an “alternate valuation date,” which is six months after the date of death. This can only be elected if it reduces the overall estate tax liability and is declared on the Form 706 estate tax return. For most inherited assets, the date-of-death value is the standard for establishing the new basis.